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How Online Payments Really Work

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How Online Payments Really Work Insights for Businesses How Online Payments Really Work If you’re thinking about setting up an online store, you’re in good company. Shoppers are increasingly turning to online options, as their access to technology and their comfort with current technology grows. Businesses that want to compete effectively need to set up their online shops to allow their customers to check out quickly and securely. The success of your online business starts with making smart choices about payment processing. So, we’ve put this document together to help walk you through the process of setting up online payments and finding the best-possible pricing and partners for your business. If you’re unfamiliar with some of the payment terms we’re using, just check the Quick Reference Guide at the end for full definitions and additional tips. How Online Payments Really Work | 1 The Players 1 Who and what enables payments and delivery Meet the partners that help you get paid. When you’re ready to start accepting credit and debit cards, you’re bound to encounter many of these characters in the payments landscape—from the technology pieces at work to help you take payments to the institutions that process and protect them. The Merchant (That’s You) The Technology Your Customers When you get started, you may work A payment gateway connects your The beauty of electronic payment with a merchant bank (aka merchant website to the payment processor processing is that it’s all behind the acquirer) that will set you up with a (effectively connecting you to your scenes from your customers’ point of merchant account—which links to customer)—moving money from a view—they just check out and it’s fast your payment processor, enabling consumer’s account via an issuer into and secure. When customers choose you to collect funds. Or, you’ll choose your merchant account. In addition to to shop with credit or debit cards, to work with a company like PayPal authorizing transactions, it also pro- their transactions are governed by that acts as your merchant account, tects electronic payments that come several players: the issuer, the Card gateway, and processor (more about through your website. If you want to Associations (Visa®, MasterCard®, this to follow). Once you’re up and accept in-person online payments, etc.), and the Payment Card selling, other players get involved. you can also manually enter card Industry (PCI). Together, these After a payment has processed, the information on a virtual terminal. But companies have created a set of funds are debited from your custom- if you’re looking to take payments on rules and regulations about encrypting er’s account by the issuer—the bank the go or have a brick-and-mortar and protecting data. If you want to that gave them the actual card. shop, a card reader (aka dongle) is a accept credit cards, you’re Then the acquirer is responsible for good idea. Many payment providers required to follow them. depositing them into your account. offer them for free, and you’ll simply pay a per-swipe fee whenever you process a card payment. A Helpful Tip What’s the difference between using a merchant acquirer or a payment provider? They both provide a lot of the same financial business products, but payment providers like PayPal can set you up with additional built-in ecommerce options, like templates for your online store, integrated checkout, shipping, and even a payment gateway. With a merchant bank, you’d need to shop around for those services separately. How Online Payments Really Work | 2 The Payments 2 The flow of money from your customer to you Most of a payment’s journey is completely invisible to consumers and businesses. Whether you’re keying-in your cus- tomer’s card or your customer is hitting a “Buy Now” button, payments go through a series of stages before they reach your account. By understanding the different stages, you’ll have a better sense of what the players are doing (and charging you for), and how to negotiate the best payment processing for your business. The following is a typical flow of a traditional transaction process. Step 1 Step 2 Step 3 Your Customer Pays Encryption Authentication Your customer has just made a purchase on When your customer’s personal information The payment processor validates (aka “authen- your site using credit or debit. The transac- and payment transaction data goes through ticates”) that the payment data is being sent by tion begins its journey through your payment the payment gateway, it’s encoded to ensure its claimed source, as a way to curb fraud. gateway. secure transmission across the Internet. Step 4 Step 5 Step 6 Authorization Settlement You’re Paid The payment processor requests the issuing Settlement occurs when the card issuer sends The funds are accessible in your merchant bank to authorize a specific amount of funds the appropriate funds to your acquiring bank, account. Yay! But you may notice that some of from your customer’s credit or debit card. which then deposits them into your merchant the funds are not available, as most payment The issuer checks to make sure the customer account. It can take a few days to complete. processors hold back a reserve temporarily to has enough credit to make the purchase and make sure you can take care of any liabilities sends back an approval or decline. This entire like chargebacks or reversals. process takes only a few seconds. Some Helpful Tips 1. Talk to your payment processor and ask them to review the reserve limit on your business. They may be able to lower it or remove it altogether. 2. Different providers offer different levels of customization. For example, when you choose PayPal as your provider, you can set up a Buy Now button in about 15 minutes, or set up a fully customized checkout with easy cart integration and a built-in payment gateway. Either way, you can start accepting online payments quickly and securely—and the checkout is optimized to make it easy for your customers, too. How Online Payments Really Work | 3 The Pricing 3 How rates and fees really work You’ve learned about how you get your money, and now you want to know: what does it cost? It’s no surprise that everyone who touches the transaction wants to get paid, including the issuing bank, the credit card associations (Visa, MasterCard, etc.), the merchant bank and the payment processor. Breaking down the fees At its most basic, every time you process a transaction, you pay several fees: Interchange fee: Markup fee: The issuer gets paid by taking a percentage of each This is a set of fees charged by everyone else who moves sale, called the interchange. This fee varies depending the transaction through the network, including your on a bunch of things, such as industry, sale amount, merchant bank, the gateway, and the payments processor and type of card used. At last check, there were almost (who might all be the same company). The amount of the 300 different interchange fees!* The fee could look like markup fee varies by industry, amount of sale, monthly this: 2.0% of the volume + $0.10 per transaction. processing volume, etc. This is really the ONLY fee where you have the ability to negotiate. Again, it is usually Assessment fee: structured as a percent of the sale amount and a The credit card association (Visa®, MasterCard®, etc.) per-transaction fee (for example, 0.25% + $0.10). also charges a fee, called an assessment. For example, 0.10% + $0.02. This rate is usually bundled with (and Other fees: called the same thing as) the interchange fee. There can also be fees charged for setup, monthly usage, hardware, and even account cancellation. How Online Payments Really Work | 4 How processors package the fees When researching what type of credit card processor is best for your needs, you’ll likely run into a variety of pricing models for processing transactions. Understanding how these rate structures work can help you choose what’s best for your business – without unnecessary costs weighing you down. See below for an outline of three main structures that are common in credit card processing. Flat-rate pricing Flat-rate pricing is the easiest pricing model to understand. It involves paying the processor a flat fee for all credit and debit card transactions, which covers all the fees mentioned above. At PayPal, our flat-rate pricing structure for businesses that have under $3,000 monthly in sales volume is 2.9 percent plus $0.30 per transaction. See the chart below for an illustration of how this flat-rate pricing might play out. (Note that fees for cards that are swiped through a terminal, instead of entered online, could be higher.) Your monthly sales volume Flat fee per transaction Fee examples $0 to $3,000 2.9% + $0.30/transaction1 $3.20 fee on a $100 sale $3,000 to $10,000 2.5% + $0.30/transaction1 $2.80 fee on a $100 sale $10,000+ 2.2% + $0.30/transaction1 $2.50 fee on a $100 sale Visit our fees page to get the full details on our flat-rate pricing. Interchange plus pricing As we mentioned above, every time your customers pay with a credit or debit card, their card issuer charges you a percentage, called an interchange. In addition, the association (Visa, etc.) adds on a fee, called an assessment. (People usually lump the two together as the “interchange fee.”)In an interchange plus pricing model, your payment processor adds a fixed markup on top of the interchange fee, instead of bundling a fee directly into the interchange.
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